No Money? No Worries. Home Lenders Ease Rules

As housing heads into the critical spring market, credit is finally beginning to thaw. Lenders are increasingly approving low down payment loans, and government sponsored mortgage giant Fannie Mae is buying more of them.

It is a noticeable shift from the last four years, when 20 percent down on a home purchase loan was the only game in the neighborhood.

PS. I appreciate the nice comments from people on my Keynesian-bashing post, but I regret my remarks claiming that most economists don’t understand the monetary offset problem. I can’t really know that, and as Matt Rognlie pointed out my analysis wasn’t technically correct either. Sometimes I let my frustration get the upper hand.

But I still think my counterfactual is plausible.

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I do not see a problem with easier credit for housing purchases, if the Fed follows a steady NGDP targeting regime.

And, of course, if some sort of minimal underwriting standards are maintained.

But when you marry gong-show property underwriting to a Fed that collapses AD…then you will have a problem.

BTW, the commercial real estate sector in the USA had a mirror collapse of the residential. These are large loans extended by sophisticated lenders to sophisticated buyers. Full blown collapse too, prices off by 40-60 percent.

This suggests to me that what Sumner always says, that AD must be steady and growing, is the real core of macroeconomics.

The good news, if you read to the end of the article, is that the CFPB is going to put a serious lid on this and impose some de facto minimum downpayment rules. But mortgage brokers and the GOP are trying to block that.

Scott: I still not think that your counterfactual is plausible and I will try to sum up what I see as the best arguments:

1) If change of monetary policy in 2009 in face of slugish AD was plausible at the time – should not this show on the market data (you are Market Monetarist after all)? If markets would have believed that FED will set things straight then by MM logic no AD and NGDP shortfall should even happen.

Ok, so the objection may be that FED actually wanted AD shortfall. No matter what, they would keep it that way – full Sumner Critique only this time claiming that FED always hits its target (in terms of AD) and if it does not hit it it *must* mean that their AD target changed.

But your actual counterfactual is even stronger then that by claiming that fiscal stimulus actually prevented correct monetary policy response. Again, where is the proof for this claim? Should not announcement of fiscal stimulus move markets into negative territory? These claims can be tested.

2) I claim that it is more plausible that central not know what they were doing (in terms of aggregate demand), they simply did not care, they cared for other objectives (like stabilizing financial system, worrying about bubbles or cared about internal politics etc). So weak AD was not an actual policy they would strive to apply and thus full monetary offset of AD stimulus is not likely.

Furthemore, I am convinced that in a counterfactual world with political climate where executive branch of government would not push for more AD stimulus, any case for more aggressive monetary policy would be weaker – not stronger (remember, AD was weak even before stimulus).

How do I know this? Because I do not have to rely on counterfactual, we have one real world central bank – ECB – and it’s policy was complete disaster.

Last time we went 17 years without two consecutive quarters of decline so when we finally had a recession and all the weak hands shook out, the risks that the government deliberately hid in MBS (in order to increase access) were very suddenly exposed.

Also, it’s a bit harder for Fannie and Freddie to lie about their exposure now.

I won’t bother with a translation but this completely refutes claims that CB policy is informed by neo-Keynesian or Monetarist, or Theravada Buddhist thinking (apologies to the Theravadas) the president of one of the more influential small countries in Europe (ie a country where the monetary spokesman can vent opinions without getting politicians into trouble and where those opinions probably reflect Germanic thinking as well) is a confirmed supply sider who believes that unemployment is an unavoidable consequence of past policies and that it is more important to concentrate on supply side reforms (more or less what he said here).

Assuming that Dutch Central bank ventings accurately reflect ECB thinking, probably if fiscal policy does not make the economy more competitive voluntarily, the CB should encourage it to do so. Who cares about unemployment? It is just a consequence of misguided policies of the past…

To continue, of course an excellent short term way to improve national competitiveness is to depreciate the currency or in modern times, sow doubt about the soundness of policy (whatever it means, as long as the markets defect from that currency). An excellent way to achieve currency weakness is to adopt MM policies during a period of deflationary expectations. The point is of course, is MM the only way to weaken the currency and is it a way that has the best long term cost/benefit ratio (from the point of view of national competitiveness) I doubt German policymakers would agree. And I doubt the Dutch Central Bank president would prefer MM as a tool for acquiring competitive advantage legitimately (in trade political terms) despite the attractive results of the Swedish experiment, for a variety of reasons.

I think it is more than plausible (more like a proven fact) that most economists don’t understand the monetary offset problem. If they understood the monetary offset problem then why are they clamoring for more government spending.

Stick to your guns. You were right the first time.

It is especially gratifying to see the government CUT spending at the same time the economy is taking off. You would think this would give hard-core new Keynesians massive cognitive dissonance, but I’m not seeing it.

‘…the CFPB is going to put a serious lid on this and impose some de facto minimum downpayment rules.’

That is rich, considering where the low-no down payment mania came from in the first place. Banks weren’t making such loans until The Boston Fed got involved in determining lending standards back in 1992. You can still read all about it on the BF website; their pamphlet ‘Closing the Gap’.

‘Down Payment and Closing Costs: Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants.
Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations, or municipal agencies to cover part of these costs.’

‘In Superman comics there exists a Bizarro World where the inhabitants do the opposite of all things normal. For example, a salesman does a brisk trade selling Bizarro bonds: “Guaranteed to lose money for you”.

‘A Bizarro World of home finance is being created by Dodd-Frank Wall Street Reform and Consumer Protection Act’s new enforcement agency, the Consumer Financial Protection Bureau (CFPB). In this world a loan with little or no money down, a FICO credit score of 580, and a total debt-to-income-ratio of over 50% is defined as a prime loan, even though it has a nearly 30% likelihood of ending in foreclosure. Like the bond salesman in Bizarro World, this sets up for failure working-class families striving to achieve the American dream. In the real world a prime loan with 20 percent down, a FICO score of 720 (the average score of all individuals in the U.S.), and a 40% debt ratio has a 1.5 percent chance of foreclosure.’

The CFPB is playing political games. It’s pretty much the captive of the Mortgage Lobby, which includes plenty of Democrats, Matthew.

Scott: Why do I think that FED did not care about AD? Because they let it fall in the first place. Because even when doing QE FED did not communicate it as an AD boosting policy. And even worse – because as you wrote so many times at least Bernanke and maybe some other people knew most of this – and I hope they communicated it to other boar members. And yet we ended up flawed policy for years. To do this requires deliberate ignorance on part of FED or some other more sinister reason, it cannot be explained by some one-time honest mistake that everybody worked to resolve next time.

If QE is a proof that central bank really cares about AD then ECB board members should all be heroes. Yet somehow they manage d not to use even standard and noncontroversial communication channels of monetary policy stance (the official interest rate is still not zero) to support AD growth and simultaneously they turned to “extraordinary measures” bending some pretty significant rules in order to support financial sector with liquidity for instance in LOTR.

But I agree that this is pure speculation. Maybe you are right and FED knew all along what they were doing to AD and they just decided to run the economy exactly as it was run – and like BoJ – they would offset any AD impact from fiscal stimulus. It will not be before long that FOMC meeting minutes of those times will be available to study.

But I do not think so. Let’s try to examine a different story. If you say that fiscal stimulus does not have any impact on the AD with inflation-targeting CB how can you explain ECB? ECB continue to use HICP as their target – even if they fully know that HICP also contains supply shocks and increases in taxes. And yet they just refuse to offset this impact on AD by temprorarily allowing higher inflation – or by turning to some other inflation measure. Are you really so sure that this happening in USA 2009 is so much implausible? If it is not implausible, then also full offset of AD impact of fiscal stimulus is also implausible.

Also there is another way that fiscal stimulus may work – by sending strong signal of one government branch to another. Let’s call it pacifying hawkish members of CB board. I remember you used example where Angela Merkel cried for fiscal stimulus as an example of ECB folly. If most powerful government members identify AD as a key issue that they want to solve, what impact does it have on CB bureaucrats? Maybe none – as in Japan until very recently. But I deem as less likely that it would be even negative – like CB actually showing muscles and disciplining prime ministers above what they would do absent such calls (and policies) and that is exactly what you claimed.

PS: It has to be said that I fully agree with you about Keynesians having a large blind spot when it comes to monetary policy (if conducted properly) offsetting impact of fiscal policy on AD. You would have to search a lot on most keynesian blogs to find any critique of Central Banks for not doing their job, while critique of “austerity” is being served on daily basis. I for once cannot condone how Krugman can condone Cameron austerity without giving at least passing remark about BOE. But being as it is, fiscal stimulus could still be effective if CB is being run badly – as it were in our case.

The man is all over the place! Now he’s saying that monetary policy can be very effective:

“falling prices worsen the economy’s situation in the short run.

How can Japan’s deflation be reversed? Assume that the Japanese government financed its deficit partly by printing money rather than borrowing. Some individuals and firms who receive this money might simply hold on to the newly minted yen, but others might choose to spend it on goods and services, thereby stimulating the economy. Similarly, higher deposits might simply add to some banks’ excess liquidity, but others might find it attractive to lend more, providing a further economic boost.

A carefully paced program could add enough to aggregate demand to pick up the slack in the economy, and reverse deflation, setting into motion a virtuous cycle. Higher prices would make debtors better off, and they might as a result begin to spend more. More debtors would be able to repay their loans, which might lead the banks to lend more. Meanwhile, the yen would weaken, helping exports, and even if the real exchange rate did not change much, given Japan’s position as a major creditor, the yen value of its foreign holdings would increase, providing still more economic stimulus.”

Patrick, Thanks, those certainly presents a very different perspective. I’m just as skeptical as you are. Keep me posted on how the regs play out.

JV, Obviously there are many possible scenarios. But I don’t see why you have so much trouble believing the Fed cares about QE. Their behavior over the past 4 years makes absolutely no sense to me unless you assume they are doing a bit of additional stimulus every time AD threatens to slow signficantly, and then pulls it away when things look better.

123, The charts of that sort I’ve seen are nothing short of absurd–they imply money was way too easy in mid-2008 even though we were plunging into recession.

Doug, Maybe he’d say they shouldn’t buy them with taxpayer-insured funds if they can’t afford them. Is that unreasonable?

Scott: “The charts of that sort I’ve seen are nothing short of absurd-they imply money was way too easy in mid-2008 even though we were plunging into recession.”
For this you need the chart of expected PCE deflator. At some moment in 2008 such a chart would show tight money.
I do not find Bullard’s charts particularly useful, but it is a realistic counterfactual – this is exactly what has happened in Europe.

What an odd claim. The GOP has actually been pushing for this kind of thing — just google [gop “minimum down payment”]. I can only assume this is some sort of reflexive “blame the Republicans for anything bad” tic on your part.

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Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...

Bio

My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.